Can corruption be moderated by formal institutions?

Corruption, which is defined as the abuse of entrusted power and authority undertaken by an individual to gain benefits for him/herself or the group that the individual belongs to (Transparency International, n.d.), is a social crime that exists in every nation over centuries and will continue to exist. It includes activities such as bribery, embezzlement, and the like, which might be considered as legal practices and conducts in some cases (Kaufmann and Vicente, 2005). Regardless of the differences in individuals’ perceptions on this social phenomenon, corruption adversely hurts the economy and the people in countries worldwide, which destroys confidence and trust in institutions (Husted, 2002). Throughout its existence, corruption has stretched its roots and penetrated horizontally and vertically in many aspects, including economic development and growth (Mauro, 1995, 1997), international trade and investment (Glynn et al., 1997), social equality (Gupta et al., 2002) and a handful of many other related socio-economic phenomena (Spector, 2005).

Consequently, striving against corruption is undeniably one of the greatest challenge of the humanity. There is a need of raising the awareness of this multifaceted social issue on a global scale, searching for incentives, rules and norms, through which people can more or less have a hand on the organizing and controlling of social, political and economic relations. Public and private, domestic and international organizations have been putting accelerated effort to establish guidelines to fight against bribery, other immoral practices and conduct in businesses (Getz and Volkema, 2001). Accordingly then comes the question of whether these efforts, in the form of formal institutions, can moderate the existence and escalation of corruption in societies and therefore, can enhance economic development.

In my paper, I will discuss the role of formal institutions in reducing the levels of corruption, and investigate the existence of the relationship between formal institutions and corruption with a sample of 148 countries. Data sets for the regression were generated from the Transparency International and the World Bank in the period of 2005 – 2015 in order to eliminate the significance of any temporary social issues over one decade. To initiate the investigation, a hypothesis is brought up as below:

Hypothesis. The higher the level of formal institutional quality, the lower the corruption level.

In general, the main findings of this paper stay in line with the hypothesis that formal institutions can moderate and discourage the existence and escalation of corrupt practices in the sample of 148 countries in the 2005-2015 period. This paper emphasizes the importance of formal institutions on reducing corruption levels, thus points out that policy makers should never cease to establish and improve institutional approaches in order to fight against corruption. Apart from that, this paper contains certain limitations due to the influence of economic growth, political systems, political awareness in the society and the like on the perceived level of corruption, which makes the collected data appear to be biased. This encourages further research to examine the nature, characteristics and intensity of corruption in different countries based on different categories in terms of levels of development, cultural dimensions, human capitals and the like.

References:

Getz, K. A., & Volkema, R. J. (2001). Culture, Perceived Corruption, and Economics. Business & Society, 40(1), 7-30. doi: http://journals.sagepub.com/doi/abs/10.1177/000765030104000103.

Glynn, P., Kobrin, S. J., & Naim, M. (1997). 1. The Globalization of Corruption. In K. A. Elliott (Ed.), Corruption and the Global Economy. NW, Washington, DC: Institute for International Economics. 7-27.

Gupta, S., Davoodi, H., & Alonso-Terme, R. (2002). Does corruption affect income inequality and poverty? Economics of Governance, 3, 23–45.

Husted, B. W. (2002). Culture and International Anti-Corruption Agreements in Latin America. Journal of Business Ethics, 37(4), 413-422. doi: https://doi.org/10.1023/A:1015248921716.

Kaufmann, D., & Vicente, P. C. (2005). Legal Corruption.

Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics, 109, 681–712.

Mauro, P. (1997). Corruption and the composition of government expenditure. Public Economics, 69, 263–279.

Spector, B. I. (2005). Fighting corruption in developing countries: Strategies and analysis. Bloomfield, CT: Kumarian Press.

Transparency International (n.d.). What is Corruption? Retrieved June 30, 2018.

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